E-Sourcing Forum » Don’t Let Supply Chain Fraud Bankrupt You!

Don’t Let Supply Chain Fraud Bankrupt You!

July 1st, 2008 at 06:26am Michael Lamoureux

In 1995, Barings Bank, the oldest merchant bank in London (at a ripe old age of 233 years), collapsed as the result of the actions of one man. Nick Leeson, a rogue trader, single-handedly brought down the bank when he amassed what was then a record 1.8 Billion in losses, which he had hidden in an obscure account (Error Account 88888) which went to different managers than the standard trading house accounts. And that was the end of the story. Right? Wrong!

In 1996, Sumitomo Corporation had to write off 2.6 Billion dollars (or 285 Billion yen) after it was discovered that Yasuo Hamanaka, a.k.a. “Mr. Copper” had executed over 1.8 Billion of unauthorized copper trades on the London Metal Exchange. It didn’t destroy the company, but it did take them years to recover. But then the market learned. Right? Wrong!

In 2003, Ramon Baez Figueroa, the former president of Banco Intercontinental, masterminded a massive fraud scheme of more than RD$ 55 billion (USD $2.2 billion) that amounted to more than two-thirds of the national budget of the Dominican Republic. The resulting crisis and subsequent bank bailout spurred 30 percent annual inflation and a large increase in poverty. The government was forced to devalue the peso, triggering the collapse of two other banks, and prompting a US$600 million loan package from the International Monetary Fund. But we finally learned our lesson. Right? Wrong!

The year is 2007. Bear Sterns starts off the year trading at over $172 a share. Jump ahead to February 2008, and Bear Sterns is still trading at $93 a share. A month later, Bear Sterns is still trading reasonably well. On March 10, the bank has over 10B in liquidity. On March 13, the bank is down to about 2B in liquidity. On March 14, the bank is in danger of collapse. Shortly after, the bank is considering a buyout at a mere $2 a share from JP Morgan chase. Why? Initially the sub-prime lending crisis was blamed as the culprit, but on June 19, two former managers were arrested by the FBI over their roles in the collapse of the hedge funds that ignited the subprime mortgage crisis under charges of fraud.

The morale? Fraud is a rampant problem, it’s not going away, and a single extreme case can bankrupt your company. You’re not a bank, you say? You’re not at risk of these kinds of fraud, you say? Well, do you hedge against price increases or currency fluctuations? And how much control do your hedge fund managers have? And how often are they monitored?

And if you really don’t hedge or play in the markets, you’re still at risk of significant losses. Consider the case of the former town official of Willimantic, Maine who managed to embezzle funds for over 10 years. Or the case of a bookkeeper who had the ability to work with numerous accounts and maintain complete control over one general ledger account. By crediting her account and placing the offsetting debit in a customer account and then reversing the debit in the customer account, which removed the debit and any evidence of the bogus transaction, she was able to proceed undetected for a substantial length of time and ultimately embezzle $250,000.

But, as you are probably well aware, financial fraud is not the only type of fraud you are at risk of. Because you’re not a bank, in addition to embezzlement and other types of financial fraud, you have to deal with quality fraud, which last year cost Mattel hundreds of millions of dollars, contamination, such as occurred in the pet food scandal and toothpaste scandal which not only cost millions of dollars but also opened the door to lawsuits a-plenty, and modern day piracy.

So what can you do? You can check out the new wiki-paper on Supply Chain Fraud on the e-Sourcing Wiki and learn to identify what types of frauds can be taking place in your supply chain, where they could be taking place, and what you can do to prevent them.

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Entry Filed under: General, Global Supply Issues/Risk

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